5 Keys to Managing Your Cash Flow So You Don’t “Grow Broke”

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By MARK MOSES

Uber has raised more than US$11bil from investors. Why? Because it has a ravenous appetite for cash. This cash fuels its growth. But this cash flow comes with a cost.

As Time wrote: “To return money to investors, it must grow. To grow, it must invest aggressively.

To invest aggressively, it needs more money from investors.” This rinse-repeat cycle of raising cash to fuel growth requires a delicate balance between investing to fund growth and profitably consolidating gains.

The jury is still out on how successful Uber will be in making the transition from a cash-sucking company, to a cash-spewing one.

How about your company? Have you struck the right balance between investing for growth and profitably funding that growth?

I’ve been around high-growth companies for decades. I have spent years building and coaching high-growth
companies. And I know that when a company is growing quickly, like Uber, it faces an incredible drain on cash. So one of the first things you should do is make sure you have a handle on your cash flow situation.

Remember, profit does not equal cash. Accounts receivable do not equal cash. Inventory does not equal cash. Cash equals cash, plain and simple.

You could grow really fast and make a tremendous profit but still run out of cash. You run out of cash, you’re out of business.

I’ve also learned that while cash solves problems, a lack of positive cash flow creates them. The dilemma is that as a company grows and invests in people, equipment, space, etc., it eats cash.

So how is it possible that a thriving business can be making a profit but lack positive cash flow? It’s because you invest a dollar today to grow the business, but you don’t get that dollar back in “cash in the bank” for 60 days. You can “grow broke” in those 60 days.

Your profit and loss account may show profit, but if your cash is tied up in product development, accounts receivable or inventory, you have a problem.

Here are five keys to managing your cash flow so you don’t “grow broke.”

1. Review your daily cash position

That’s right, take a look at your cash in the bank daily. Look at the trend; is it growing, shrinking, or staying the same? Compare it with accounts receivable and accounts payable.

If accounts receivable is growing faster than your cash, you have a problem brewing.

2. Shorten your cash operating cycle

Every firm needs to calculate its cash operating cycle. It measures the time from when the money leaves your business to the time you get it back in the form of cash in the bank. Take a look at the diagram (see Graphic 1)

All the way on the left is the time when you take the inventory on. Next you pay for the inventory. Then you get to the point where you actually sell that inventory. Finally, at some time out on the right side of the diagram, you get paid.

That is the cash operating cycle, and most firms have no idea what theirs is. Even in a service business, this cycle exists, minus the inventory part.

Keep in mind, the more you can decrease your cash operating cycle, the more cash you create. The more cash you create, the faster you can grow.

The best article I’ve seen written on this topic was in the Harvard Business Review. It’s called “How Fast Can Your Company Afford to Grow?” by Neil Churchill and John Mullins. It’s a short read, but I cannot imagine running a business without a grasp on those concepts.

Here are five ways to shorten your cash operating cycle:

Ask your clients to pay you more quickly. If you give them 30 days to pay, make it 15. If you bill once a month, start billing twice a month. Simple idea but big results.

Bill in advance.
This works particularly well if you are a service business. Bill for your service 15 or 30 days in advance.

Deliver your product or service quicker. The faster you can turn around your product or service, the sooner you’ll get paid and the less money you’ll have tied up in “work in progress.”

Factor your accounts receivables. If you’re really in a cash crunch, you can “sell” your accounts receivable to a factoring company at a discount. You get the cash immediately. This is a short-term solution but an expensive long-term strategy.

Reduce billing errors. Take time on the front end to ensure that your billing is accurate so you do not waste time (and money) on the back end fixing it.

Take a moment now and determine which of these five levers you want to pull in your business starting in the next 30 days.

For example, you may need to monitor days sales are outstanding, inventory turnover, gross margin, and your current ratio. If the numbers are heading in the wrong direction, take action immediately.

4. Monitor your budget on a monthly basis

Each month, take the time to review your budgeted expenses and compare them to what you have actually spent. Are you spending above or below budget? Discuss the variances and take action as needed.

5. Review your cash flow statement on a monthly basis

A cash flow statement identifies how much cash came into the company and how much went out during a specified period. You might be generating a profit, but this statement will show if you’re turning that profit into cash fast enough to fund your growth.

It comes down to this: You really need to know your numbers. Unfortunately, most small firms – and many midsize firms – fall short in this area.

They just don’t have the right financial talent on board. As a short-term measure, you can outsource your number crunching to a good bookkeeper or an outsourced chief financial officer firm until you get the proper finance team on board.

My entrepreneur coach used to tell me: “Show me a company without numbers, and I’ll show you a company that’s in trouble.” Cash solves problems, he emphasised. Losses create them.

It is the business leader’s job to know those numbers, the margins, and what drives them.

A competent business leader will look at the critical numbers and the key performance indicators on a daily, weekly, and monthly basis.

I cannot emphasise enough the importance of monitoring your cash flow. I’ve seen too many businesses go off the rails because they got into a cash crunch. Knowing your numbers and having a solid financial team will keep you “in the money.”

Mark Moses is the founding partner of CEO Coaching International and the Amazon bestselling author of Make Big Happen. His firm coaches over 100 of the world’s top high-growth entrepreneurs and CEO’s on how to dramatically grow their revenues and profits, implement the most effective strategies, becoming better leaders, grow their people, build accountability systems, and elevate their own performance. To contact him, email editor@leaderonomics.com